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The Rule of 72

A simple way to estimate the time it will take for a sum of money to double is to use the rule of 72. Basically, you divide 72 by the interest rate, per year and the result is the number of years it will take for your money to double.

For example:

$10 000 invested at a 3% interest rate will take 24 years to become $20 000.

Invested at 8%, it will take 9 years to double.

Why is this important? These days, interest rates in North America are ridiculously low so parking your money in the bank is quite obviously a terrible idea. You’re actually losing money due to inflation. Bonds also face a similar fate.

What option does that leave? The stock market! Dividend stocks often pay 3-5%, with the additional benefit of increasing payments each year, which aren’t guaranteed, but which many blue-chip companies do. Plus you have the benefit of possible stock price appreciation.

So, if a stock pays an average of 3% in dividends/year, plus has an average stock price appreciation of 5%/year, your total annual return is actually 8%, which means that your money can double in approximately 9 years according to the rule of 72. Of course, this is a simple calculation which isn’t factoring in dividend increases, taxes, stock price depreciation, dividend cuts or trading fees but the basic idea is quite helpful.

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